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The Impact of Court Errors on Liability Sharing and Safety Regulation for Environmental/Industrial Accidents

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  • Marcel Boyer

    ()

  • Donatella Porrini

Abstract

We focus in this paper on the effects of court errors on the optimal sharing of liability between firms and financiers, as an environmental policy instrument. Using a structural model of the interactions between firms, financial institutions, governments and courts we show, through numerical simulations, the distortions in liability sharing between firms and financiers that the imperfect implementation of government policies implies. We consider in particular the role played by the efficiency of the courts in jointly avoiding Type I (finding an innocent firm guilty of inappropriate care) and Type II (finding a guilty firm not guilty of inappropriate care) errors. This role is considered in a context where liability sharing is already distorted (when compared with first best values) due not only to the courts’ own imperfect assessment of safety care levels exerted by firms but also to the presence of moral hazard and adverse selection in financial contracting. There is also not congruence of objectives between firms and financiers on the one hand and social welfare maximization on the other. Our results indicate that an increase in the efficiency of court system in avoiding errors raises safety care level, thereby reducing the probability of accident, and allowing the social welfare maximizing government to impose a lower liability [higher] share for firms [financiers] as well as a lower standard level of care. Nous considérons dans le présent document les effets des erreurs judiciaires sur le partage optimal des responsabilités entre entreprises et financiers, comme un instrument de politique environnementale. En utilisant un modèle structurel des interactions entre les entreprises, les institutions financières, les gouvernements et les tribunaux, nous montrons, au moyen de simulations numériques, les distorsions dans le partage de responsabilités entre entreprises et financiers qu’implique la mise en œuvre imparfaite des politiques gouvernementales. Nous considérons en particulier le rôle joué par l'efficacité des tribunaux à éviter les erreurs de type I (condamner une entreprise innocente de manquements à la sécurité) et de type II (ne pas condamner une entreprise coupable de manquements à la sécurité). Nous considérons un contexte où le partage des responsabilités est déjà altéré (par rapport à l’optimum de premier rang), en raison non seulement des difficultés des tribunaux à observer correctement les efforts de prévention des entreprises mais aussi de la présence d'aléa moral et sélection adverse dans les contrats de financement. Il n'y a pas absence de congruence entre les objectifs des entreprises et financiers d'une part et la maximisation du bien-être social d’autre part. Nos résultats indiquent qu'une plus grande efficacité du système judiciaire à éviter les erreurs entraine une hausse des activités de prévention d’accident et donc une baisse de la probabilité d'accident, et permet de réduire (d’augmenter) la part de responsabilité des entreprises (financiers) et de réduire le niveau requis de prévention.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 2010s-48.

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Date of creation: 01 Dec 2010
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Handle: RePEc:cir:cirwor:2010s-48

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Keywords: Environmental Policy; Court Efficiency; Liability Sharing; Regulation; Incomplete Information; Politique environnementale; efficacité des tribunaux; partage de responsabilités; informations incomplètes;

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References

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Cited by:
  1. Pierre Bentata, 2014. "Liability as a complement to environmental regulation: an empirical study of the French legal system," Environmental Economics and Policy Studies, Society for Environmental Economics and Policy Studies - SEEPS, Society for Environmental Economics and Policy Studies - SEEPS, vol. 16(3), pages 201-228, July.

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